Saturday, February 07, 2004

How deficits matter

The NRO has a piece decrying Bush for running up a big deficit. I don't care about the deficit -- and neither should you.

Instead, you should be caring about long term interest rates. The 10-year bond rate is a touch over 4% nominal, which I guess makes it around 3.5% in real terms. This is VERY LOW by historical standards. This is also VERY LOW by international standards -- countries that are lower (like Japan) are actually suffering through deflation. When Paul Krugman was sane, he recommended that Japan print money to trigger inflation, and one way to print money is to run up deficits.

The harm from deficit spending comes from what it does to the interest rate -- by raising rates it crowds out private investment and this is bad for growth. But the problem is not the deficit itself -- that can be rolled over indefinitely.